Generally the installment sale method is not allowed for related parties. If a taxpayer sells the property to his brother at fair market value on an installment basis, what would be required to be able to report on an installment basis for tax purposes? What kind of proof is required that tax avoidance is not a principal purpose of the sale?
-
-
Tough One
I think you would fight an uphill battle in justifying installment sale treatment. However, the old faithful argument "terms and conditions" is always an appropriate answer. This timeworn answer is a favorite among some of us on the board because --- who can argue against it?? Doesn't always give you specifics if you need them though.
I don't know that I could convince an auditor but the possible evidence could be:
(1) A healthy interest rate - higher than conventional lenders.
(2) A family member that is uncreditworthy. Sometimes this can be combined with #1 above.
(3) Earnings trends in the future that put the seller in a higher tax bracket. In fact, a couple more years might transpire before the seller is required to prove.
(4) The selling point in #3 above could be enhanced if the seller elected OUT of the installment treatment in a year that resulted in a greater tax than would have been the case in year 1.
(5) The family member is a business partner with the seller, and the installment payments are a necessary element of providing a business purpose (as opposed to lump sum financing by the buyer). I don't like the complicating implications of such an arrangement but I suppose if someone could forge such a reason, it might be acceptable.
Hoping others will post to your question. Ron J.
Comment